Central Bank raises rates as March inflation comes in at 2.4 percent

Spurred by rising costs in food, clothing and utilities, and with cumulative increases in prices reaching 6.3% so far in 2017, monetary authority reacts

Consumer prices increased 2.4 percent in March, spurred by increases in food, clothing and utility rates, prompting an increase in the annual interest rate by the Central Bank to 26.25 percent from 24.75.

With the 2.4 percent rise in consumer prices reported by the Indec statistics bureau, cumulative inflation for 2017 is up to 6.3 percent. The Central Bank (BCRA) under the leadership of Governor Federico Sturzenegger has set annual inflation targets for 2017 of between 12 and 17 percent and thus far has said that it intends to reach them.

Containing inflation

The 2.4 percent increase in comparison to prices in February — equivalent to a 31.8 percent increase on a year-to-year basis — was driven forward by a 5.6 percent increase in the cost of education, 4.8 percent in clothing, three percent in food and drinks and 2.2 percent in housing and basic services.

Inflation in January clocked in at 1.3 percent, February’s was recorded at 2.5 percent.

Market expectations according to the Central Bank had been in the range of 1.8 percent — based on estimates by banks and consulting firms — and the higher result took some by surprise.

Nearly half of the increase was attributed by the Indec statistics bureau to food and drinks given it’s prevalence in the basket of goods used to calculate consumer inflation. Food and beverages account for just over a third of the basket. Rising garment prices amounted to 0.38 percent of the 2.4 percent monthly inflation and housing costs contributed 0.24 percent of the total. Each have a weight of about eight percent in the basket of goods and services according to the INDEC.

Seasonal products (worth 10.8 percent of the basket), such as fruit, vegetables, tourism, certain kinds of clothing and hotels were up by 3.7 percent in comparison to the previous month. Core inflation (equal to 69.9 percent of the basket) was 1.8 percent and the prices of regulated goods and services (such as utilities, health services, public transport) increased by 3.3 percent compared to February.

After a spike in early 2016, monthly inflation has slowly coming done since then but the increase since the turn of the year threatens the government’s commitment to contain inflation in 2017. Increases in utilities are still pending for the remainder of this year.

As such, the estimates for inflation in 2017 are in the range of 21.1 percent.

This week the Central Bank increased its reference interest rate by 1.5 percentage points to 26.25 percent, in a bid to snuff out a fresh and sustained inflation rate. The move is consistent with recent increases in rates and matches to the conclusion by the Central Bank that “inflation in April could continue to be higher than what is compatible with the path established by the monetary authority. The Central Bank will maintain its clear anti-inflation strategy to ensure that that the deinflation process continues toward a path of between 12 and 17 percent for 2017.”

Dujovne weighs in

Treasury Minister Nicolás Dujovne yesterday asserted that the BCRA’s restrictive policy to fight inflation “is a necessary condition,” and pointed out that the 2.4 percent increase in prices in March is “quite lower than what we had every month during the Kirchner administration.”

“We are worried about and alert to the 2.4 percent inflation rate, but we must not forget that we come from many years of a stagnated economy, with a 30 percent annual inflation rate and no-one used to worry about the issue,” Dujovne told La Red radio station.

The minister highlighted the importance of having an INDEC that “acknowledges inflation and which produces statistics that are indisputable.” However, the minister made it clear that the average inflation rate of the last six months is 1.8 percent, monthly.”

“If the Central Bank didn’t do what it does, inflation would be higher and the economy wouldn’t grow,” added the official.

“During the fourth quarter (since taking office) the growth (of the economy) increased and during this first quarter too. We need to be patient, it is a long process that continues at a good pace,” stressed Dujovne.

In that sense, the minister added that “there are costs and benefits when you make economic policy decisions. The Central Bank provides predictability; it takes pesos away from the market.”

“The market’s actors sense inflation will be lower in the future and credits will not suffer,” concluded Dujovne.